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Payment notices and pay less notices: a strict approach continues

It has become increasingly common for employers to be faced with so called “smash and grab” adjudications for the full amount of a payment application where they have failed to issue either a payment notice or a pay less notice. Reflecting the seriousness of these consequences, recent decisions of the TCC have laid down strict guidelines for what constitutes a valid payment application. A decision of the TCC last week has confirmed this approach and provides fresh guidance in relation to the requirements for a valid pay less notice.

Jawaby Property Investment Limited v The Interiors Group Limited

The Interiors Group Limited (“TIG”) was employed by Jawaby Property Investment Limited (“JPIL”) to carry out refurbishment works in an office block in central London. TIG, which was going insolvent and unable to pay its subcontractors, sought to trigger payment of some £1.1m under a separate escrow agreement, on the basis that the sum was applied for under the contract and JPIL failed to serve a valid pay less notice.

JPIL applied to the court for a declaration that either TIG’s application was invalid, or alternatively that its own pay less notice was valid, and that TIG was not entitled to payment nor to call under the escrow agreement.

The issue concerned TIG’s seventh application for payment which was made in January this year. The procedure which had been followed for the first six applications is that TIG would send a valuation by email, with a spreadsheet and back up sheets, and a statement of the sum applied for. Each valuation was up to the 8th of the month (as per the contract) and would state that the valuation was for“approval” or “consideration”. JPIL would visit site, then issue a Certificate for Payment (i.e. a payment notice), following which TIG would submit an invoice.

This time though, JPIL started the ball rolling with an email on 5th January requesting a valuation the next day. TIG responded on 7th January saying “[p]lease see our initial assessment for Valuation 007”.JPIL visited site on the 11th, and on the 15th issued a Certificate for Payment. Both parties accepted that it was served too late to be a valid payment notice.

TIG emailed back the same day requesting a mark-up of their valuation (as had become the norm between the parties) and asking an explanation of the low valuation. JPIL replied on the 18th, providing the mark-up and explaining their valuation.

Was there a valid payment application?

As to the validity of TIG’s payment application, the court agreed with JPIL. Noting in particular that TIG had described its valuation as an “initial assessment”, the court found that it “… cannot objectively be construed as a statement by TIG of what it considered was due to it …”. The impression of provisionality was also supported by the incorrect labelling of the summary sheet, and the fact that the valuation went up to 7th January, and not the 8th (as in the contract and in all other applications).

The court referred to previous TCC cases which required an “application for interim payment [to] be in substance, form and intent an interim application stating the sum considered by the contractor as due at the relevant due date and it must be free from ambiguity”. TIG’s application failed this test as “[t]he reasonable recipient of the Valuation would not have regarded it as unambiguously informing it that this was an Interim Application for the purpose of Clause 4.8.1”.

Was there a valid pay less notice?

Although not strictly necessary, the court went on to consider whether JPIL had served a valid pay less notice by virtue of its email of 18th January. JPIL argued that a more generous approach should be taken to the validity of a pay less notices than is applied to applications, as the consequences of a valid pay less notice are less draconian.

The court had little sympathy for this submission, finding that an essential requirement for the service of a pay less notice was a positive intention to serve such a notice. The email in question had been intended to supply a mark-up of the valuation and provide an explanation of the Certificate – both in direct response to TIG’s earlier email requesting the same. Further, the form of the email was completely different to previous pay less notices served by JPIL and there had been no prior practice to treat emails as such – the earlier notices had been formal and clear. Viewed objectively, therefore, JPIL had not intended to serve a pay less notice by its email.

Conclusion

Last week's decision confirms the robust approach being taken by the TCC to the validity of payment applications in light of the potentially draconian consequences which can follow in the absence of payment or pay less notices submitted by the receiving party. Such applications must be an application in “substance, form and intent” and be clear and unambiguous in their terms.

The decision also provides some helpful commentary as to the requirements for a valid pay less notice, an area in which there is comparatively less guidance from the TCC. It is too early to say whether the same strictness which applies to payment applications will also be applied to pay less notices, but this decision suggests that parties are unlikely in many cases to be able to rely on informal communications as amounting to valid pay less notices. It will need to be clear that the communication relied upon was intended to be a pay less notice and not merely the paying party’s view as to valuation of a particular application.

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